Q2 2023 BM Technologies Inc Earnings Call
For those joining on the webcast you can submit your questions online or the management team can see them.
At this time I'd like to turn the conference call over to Brian <unk> Investor Relations for B M technologies.
Please go ahead.
Thank you operator, and good afternoon, everyone.
Thank you for joining us for <unk> Technology's second quarter earnings call before we begin we would like to remind you that some of the statements. We make today may be considered forward looking these forward looking statements are subject to a number of risks and uncertainties that may cause actual performance results to differ materially from what is currently anticipated.
Please note that these forward looking statements speak only as of the date of this presentation and we undertake no obligation to update these forward looking statements in light of new information future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our Form 10-K, and 10-Qs for a more detailed.
A description of the risk factors that may affect our results copies may be obtained from the SEC or by visiting the Investor Relations section of our website at.
At this time it is my pleasure to turn the call over to level leads to do P. M technology CEO of Layne.
Thanks, Brian and good afternoon, everyone.
Joining me on the call today is Raj Singh, our co CEO and Jim <unk> our CFO .
On today's call, we will discuss our second quarter and first half of 2023 results. We will also provide updates on various initiatives, including our partner bank profit enhancement plan and growth initiatives.
As I mentioned on our first quarter call.
This past year has been challenging, especially for Fintech, we have had to adapt to unprecedented interest rate increases changes in the regulatory landscape crusher on fintech valuation a banking crisis and the end of unprecedented stimulus into the system just to name a few.
With these changes came to need to look closely at our company and adapt to the shifting realities of today.
In response, we pivoted from becoming a bank to focusing on becoming a lean innovative and risk oriented fintech and.
In doing so we made several significant decisions and took decisive actions since the beginning of the year to strengthen our foundation and position us for growth in 2024 and beyond.
Some of these actions included one or a large reduction in force, including changes at the executive leadership level.
Two entering into a definitive agreement with Durbin exempt first Carolina bank for higher education portfolio, three renewing our relationship with our largest bass client for another two years for <unk>.
Amending our deposit agreement with customers bank to reflect variable rate pricing to increase our margin and five recruiting and bringing on a seasoned executive like Raj Singh to serve as my partner and co CEO .
These changes continue to position us well for our future we.
We haven't stopped here, we continue to build upon the momentum in the first quarter of the year to where we sit today, we will talk more about some of these initiatives throughout our call.
Before getting into that I would like to briefly mentioned some financial highlights from the quarter and first half of the year.
Operating revenues for the three and six months ended June 32023 totaled $13 million and $26 5 million respectively.
How did Durbin exempt bank partners, who had been in place during the second quarter, our interchange revenue for our higher education vertical would have been at least 50% higher on a gross basis. This would have resulted in positive core EBITDA for the second quarter.
With regards to this I would also like to mention that we have a significant update as it relates to our partner first Carolina Bank we.
We have recently entered into an amendment of our existing deposit agreement that will allow us to accelerate the transfer of our higher education deposits independent of the ongoing regulatory review process. We plan to transition these deposits as soon as possible, but no later than December 31 of this year.
We review, we view transitioning of these deposits as a very high priority to ensure positive cash flow and to position our company for growth over the long term.
We're also on track to realize the benefits of our profit enhancement plan with a goal of cutting costs by $15 million.
At the end of the second quarter, we had already realized over 60% of those estimated savings and we anticipate that we will complete those initiatives throughout 2023 and into 2024.
Lastly, the addition of Raj Singh as co CEO has been valuable as he has focused its efforts on enhancing our systems processes and product offerings to further drive cost efficiencies and identify new revenue opportunities for the company.
We believe these initiatives will continue to enhance our value Roger will speak about some of these initiatives shortly additionally.
Additionally, we are actively exploring how to effectively use AI to improve our operations risk management fraud capabilities and customer engagement as.
As I stated earlier, we view 2023 as a year of strengthening our foundation. So we are well positioned for growth in 2024 and beyond and we believe we are on a solid path to achieve this.
I will now turn the call over to our CFO , Jim Dellinger to review financials Jim.
Ali.
The second quarter of 2023, the company earned $13 million of operating revenue as compared to $23 million in the prior year.
For the first half of 2023, the company earned $26 $5 million of operating revenue as compared to $48 million in the prior year.
Servicing fees for the second quarter of 2023 totaled $7 7 million as compared to $13 3 million in the prior year.
For the first half of 2023 servicing fees totaled $14 3 million as compared to $27 5 million in the prior year.
For the first quarter of 2023 servicing fee revenues were negatively impacted by the fixed rate servicing agreements that were in place.
Beginning in the second quarter of 2023, and under the amended deposit servicing agreements with customers Bank.
Servicing fee margins improved by approximately 175 basis points at the current fed funds rate due to the impact of the new variable rate agreements.
Interchange and card revenue totaled $1 8 million for the second quarter of 2023 as compared to $5 3 million in the prior year.
For the first half of 2023.
Interchange and card revenue totaled $4 9 million as compared to $12 million in the prior year.
For the first half of 2023 interchange and card revenues were negatively impacted by the temporary loss of Durbin exempt interchange fees.
The move to FCB is expected to significantly improve interchange rates for our higher education vertical.
How did Durbin exempt bank partnership in place for the first half of 2023.
Total interchange in card revenues would have been at least 50% higher than the $4 9 million reported.
Average service deposits totaled $0 9 billion.
For the second quarter of 2023 down from the $1 2 billion for the first quarter of 2023 and from the $2 billion for the second quarter of 2022.
Substantially all of this balance reduction occurred within our best vertical.
As discussed in our prior calls we.
We strategically allowed our highly interest rate sensitive deposit accounts to run off in late 2022 and year to date 2023.
Versus repricing at potentially unprofitable levels.
We anticipate this run off to moderate as interest rates begin to peak with deposit growth resuming in late 2023 and beyond.
Okay.
Deposits were 90 day active accounts at June 30th averaged $1623 within our higher education vertical and.
At $4443 within our vast vertical.
Both comparing favorably to market averages.
Spend totaled $658 million for the second quarter of 2023 down from $787 million for the first quarter of 2023, and <unk> $682 million for the second quarter of 2022.
Spend for 90 day active account for the second quarter of 2023 averaged $1855 within our higher education vertical.
And $1508 within our vast vertical.
Both up significantly when compared to the second quarter of 2022.
Overall, we continue to see spend in our higher education vertical normalizing in 2023 to pre COVID-19 levels.
Annualized debit card spend for highly active SaaS users.
As with both direct deposit and a minimum of five customer driven transactions per month.
It was approximately $18740.
During the second quarter of 2023.
This very attractive cohort makes up approximately 22% of active accounts at June 32023, as compared to 19% in the year ago period.
Account fees and University of fees totaled $3 3 million for the second quarter of 2023 as compared to $3 7 million in the prior year.
For the first half of 2023 account fees and University fees totaled $6 9 million as compared to $7 8 million in the prior year.
During the second quarter of 2023, the company retained over 98% of its higher education institutional customers and with our continued strategic focus in 2023, we anticipate growth in both the number of active accounts and account activity.
There were 108000, new account sign ups in the second quarter of 2023, and 213000, new account sign ups in the first six months of 2023.
In our higher education vertical new checking account sign ups improved 11% year over year.
We processed over one 8 billion.
Student financial aid refund disbursements during the second quarter of 2023 as compared to $2 billion.
During the second quarter of 2022.
Yes.
Core operating expenses totaled $13 9 million for the second quarter of 2023, comparing favorably to the $15 4 million incurred for the first quarter of 2023, and the $17 3 million incurred for the second quarter of 2022 with.
With sequential quarterly reductions since the third quarter of 2022.
For the first half of 2023 core operating expenses totaled $29 3 million comparing favorably to the $33 1 million in the prior year.
The company continues to actively executed upon its path with initiatives completed during the first half of 2023 that are expected to lead to the realization of over 60% of the targeted $15 million of cost savings for the full year 2023.
We are confident that we will achieve our full pep target with potential continuation into the first half of 2020 for some of our cost reduction efforts are partially offset by investments in technology operational processes and data initiatives.
Core loss before interest taxes, depreciation and amortization totaled negative $0 9 million for the second quarter of 2023, comparing favorably to the negative $1 9 million for the first quarter of 2023 and unfavorable unfavorably to the $5 7 billion core EBITDA earned for the second quarter.
Our 2022.
Substantially all of the year over year decrease in core EBITDA is driven by the 44% reduction in operating revenue.
Offsetting in part by the 20% reduction in core operating expense.
Importantly, the improvement in core EBITDA from the first quarter is expected to continue for the remainder of 2023.
Liquidity remains strong at June 30 of 2023, with 11 5 million of cash $9 $5 million of working capital and no debt.
In addition, the company anticipates monetizing approximately $4 5 million in tax receivables by the end of 2023.
For the second half of 2023, the company expects to generate positive core EBITDA and operating cash flow.
<unk> of the effect of the delayed transfer of our higher education customer deposits and the continuing challenging economic and interest rate environment.
With that update I would like to turn the call over to Raj Singh <unk>.
Roger.
Good afternoon. Thank you everyone for joining as Loveline mentioned earlier 2023 years of year of foundational change for the company markets continue to evolve and we are working to set up the company for sustained growth with multiple revenue channels over the long term.
One of our highest priority of our president and Chief Technology Officer, Jamie Donohue is modernizing and simplification of our technology platforms throughout the company as an example, currently the higher education business and bass business run on separate platforms. We are working to unify those platforms, which will create operational efficiencies.
<unk> cost savings enhanced user experience and operational flexibility that will allow us to quickly adopt and deploy several new features and products with our accounts.
Separately, we are fully migrating all platforms to Microsoft Azure. We believe these actions combined with increasing our data analytics resources will be key to better accessing and understanding our data data will drive our customer acquisition marketing initiatives identified key consumer behaviors and much faster decision, making.
Around our business additions.
Additionally, we have now successfully entered into new partnerships to unlock value added features and products that can enhance the banking experience for our customers and University partnerships. Some examples include first our recently announced acquisition of software technology from Anvil Anvil as one of the first digital banking platforms to use.
AI to automate elements of People's financial lives. The platform helps customers manage their finances from simple budgeting to investment avoid unnecessary debt and create real real savings and well, we want to utilize that software and layered into our existing platform overtime.
Second partnering with card as an enhanced account feature to deliver cashback reward programs customers and connect them with the brands that they love. Our survey results conclude that this is the most sought after feature that our customers desire, we will leverage our 1 million plus accounts to capture revenue share with this new feature.
In 2024.
Third launching a new student identity verification service BMT ex identity verification, we referred to it as IV, where universities can control fraud vulnerabilities during student enrolled processes and choose risk level preferences are strong market share and longstanding relationships with approximately 700.
Third 50 campuses will drive a significant opportunity to deepen our ties to our University partners. We expect to launch the service in late 2023 and expect revenue in 2024.
These are just some of the initiatives and partnerships that are working on to bring a better more modern and more user friendly banking experience to our customers and University partners through our increased corporate development efforts, we look forward to bringing additional features products and partnerships to the forefront in coming quarters.
Making investments in our technology and products, while concurrently focusing on operational and cost efficiencies is key is setting us up for long term growth and value creation were consistent with our message across all areas of our business to leverage automation and utilize additional processes and systems that resulted in faster and better data.
That will drive our decisions. These significant moves will take time to reap the benefits, but we do expect to begin realizing these benefits beginning in 2024.
We appreciate all of your support and Youre, taking the time to join this call I look forward to seeing the fruits of our labor translating to better operations satisfied customers and clients and stronger partnerships I will turn the call back to love lean for some final comments.
Thank you Raj we continue to believe we have significant untapped opportunities ahead of us given our scale existing partnerships and the rapid technology advancements we are seeing in areas such as AI. We are excited about our future and believe the foundation setting efforts, we are making in 2023.
<unk> will help propel our growth in 2024 and beyond.
Most importantly, I want to thank our passionate and dedicated employees. It is with your hard work and talents that we sit in this exciting position today.
I also want to thank our investors for your support and for your time today I will now turn the call over to the operator. So we can open the line for questions. Thank you.
Thank you if you'd like to ask a question over the phone. Please press star followed by the number one on your telephone keypad.
If you'd like to submit a question via the webcast. Please select the Q&A button located on the bottom right of the webcast page.
We will begin with questions from the phone.
Your first question comes from the line of Mike Grondahl with Northland Securities.
Your line is open.
Hey, guys. Thanks, a lot.
Two questions on deposits.
Kind of what's your outlook for higher Ed deposits.
In new business deposits.
And then specifically on the new business deposits.
Can you remind us what you're paying the interest rate the end customer is getting.
What youre getting from customers Bank I'm, just trying to figure out sort of what your carrier spread is there currently.
Do I think that hey, Mike good to see or hear from you its been awhile.
So Mike let me try to answer the deposits first so I think that.
What we had sort of guided to before was that we were hoping that we peaked out in interest rates as we've seen the interest rate environment continues.
To change and.
It continues to be increasing and so unfortunately that does have an impact on you.
Our deposits and we continue to see a runoff.
I'd say that.
We can't predict the future there is a chance obviously that interest rates continue to increase through the end of the year, which would continue to create a little bit of a runoff on our deposits, but we're working really hard and Raj spoke about in his comments is that we're working on many different initiatives to help with account growth deposit growth and overall increase.
<unk> engagement.
That we believe can have an offsetting effect.
So I just wanted to say that given where things stand there is a possibility that we could see a continued drag on deposits, but hopefully a stabilization by the end of the year.
Got it and then just a spread on the new business deposits.
We haven't.
<unk> talked about this because of competitive reasons remember we had shared that it's really important for us, but the most important thing to make clear is that it is a variable rate pricing in an increasing rate environment. That's helpful to us and we did say that.
Without specificity that there we have seen about a 175 basis point increase in margin with our new variable rate pricing agreements in place.
Got it got it okay.
Maybe then just turning to the back half of the year.
Should we think about the.
Quarterly operating expense level that $18 million in <unk>, Jim I mean it.
It feels like it's got a fade or drop a little bit from there, but how should we think about that as we're kind of modeling out the back half.
Yes. Good question, Mike I guess, a couple of thoughts as I think your your statement that youll see in the second half.
<unk> decreasing and core operating expenses is spot on right, that's consistent with our Pep initiative and what we expect to see from that.
Overall for the second half.
As we stated earlier, we expect to generate positive core EBITDA and operating cash flow and that's inclusive of what we're seeing not only with the.
The delayed transfer of our higher Ed deposits, but also what we see from a standpoint of the economic and interest rate environment before core Opex, we would definitely expect to see the continued benefit of our pep in those numbers.
Got it.
Maybe lastly for Raj.
I think you've talked about the card cashback rewards.
And also that students.
Yeah.
Is there any economics, you can share whether that's sort of like per customer per transaction can you frame up for.
Is that revenue in 2024.
Well, let me try to go broad and narrow.
At the moment.
Heavily investing in our overall corporate development infrastructure and we're rapidly.
Pursuing a variety of higher Ed focused products and services and different partnerships.
So while these are the ones we highlighted we're looking at this as an overall strategy to increase various revenue sources.
That are not purely linked to deposits and transaction fees.
That said.
With respect to these two in particular, we do plan on providing updates in terms of projections.
But.
At this stage, we're not in a position to disclose what we anticipate those to be.
In the card.
And the card feature that is something linked to actual accounts. So those will be transactional related.
In the IV product service those are linked to our University partners and so those will be probably both.
Scripture based and process oriented.
Got it okay. Thank you.
Your next question comes from the line of Greg <unk> with Chardan. Your line is open.
Hi, Thanks for taking my questions.
I think you said in the press release and the uptick in community colleges can you kind of give us a framework for how much that represents.
Higher education business, and how we might want to think about that.
Yes, I think that we just wanted to be able to comment on sort of the macro environment I wouldn't give too much sort of emphasis on it in the sense that this is a rebound meaning the last two years with Covid, we actually saw enrollment decline. So if anything we're just going back to normalized levels.
This is not.
A greater macro trend that we can consider to be ongoing. So we just wanted to say, it's a rebound and that's a positive momentum to help us to be able to capture more applications and potentially more customers.
Okay, and then just one follow up can.
Can you just.
The stabilization you're seeing in bass.
Deposits.
Any opportunity to kind of re grow that or timeframe, our runway or do you think it's just going to stay stable FERC for a while is that.
Kind of the outlook.
This stage.
As interest rates may or may not have peaked.
Do believe that there is still at risk for some level of decline that said there is other characteristics that we're observing in terms of new account sign ups and volume of account activities, which are showing some promise.
We do actively work with our <unk> partnership too.
<unk> ways of increasing.
Customer adoption and customer utilization. So that is a very active process thats underway. So our hope and desire and effort is exactly what you're suggesting which is to work to grow that business.
And hopefully offset some of the decline that are linked more directly to interest rates.
Okay helpful. Thanks, a lot.
Thanks, Greg.
Your next question comes from the line of Bill <unk> with Titan Capital. Your line is open.
Thank you actually I do want to pick up further on the deposit commentary.
Have you been seeing a slowing.
In the deposit runoff after June 30th or what have you been seen since June 30.
Yes Bill.
Good to hear from you.
We definitely see some moderation I think when we had our last call we spoke to stabilizing and stabilized that.
That trend line has taken a bit longer than we anticipated in the prior call, but we are starting to see encouraging signs that the rate of decline is certainly decreasing and I think as Roger had mentioned we are optimistic that with the efforts by the company.
We will we will be in the stabilized position and hopefully return to a growth position in 2024.
And so since June 30, if you have seen.
A moderation in that decline.
But what we've seen is exactly as you just articulated is the rate of decline is moderating from what we experienced in the first half of the year that's correct.
Great. Thank you Tim.
Then let's talk about first Carolina. Please any amendment, what affectively does that do since you don't have regulatory approval.
Alright, yet.
Yet walk walk us through what.
It really.
Effectively does please.
Yes. So we recently entered into an amendment of our deposit agreement with first Caroline a bank really to be able to ensure that we can push forward on our mutual commitment to transition. These deposits as soon as possible onto first Carolina bank's balance sheet.
I don't I don't really want to comment on our process, it's really geared towards our bank partner and it's their process again. These are very much about.
Characteristic of balance sheet of deposits on the balance sheet and that is something that our bank partner is comfortable sort of moving forward with in either direction and so that has been a huge asset and a great victory for us mutually that we don't have that obstacle and we're ready and able to move forward.
Thanks, Bob Lane, and so too to add some clarity to make sure I'm following you.
At first Carolina.
Sided however, these deposits are characterized they're okay with that so they are ready to start bringing them on.
Now onto their balance sheet and ultimately.
The what.
What the regulators determine in terms of how those deposits are characterized.
That's that's really not what you'd be waiting for or I guess Martin.
Carolina would be waiting for essentially to get the.
Accounting dialed in.
That's right Bill.
Great. Thank you and.
Lastly.
Once.
Agreements are in place.
<unk> and.
Assets moved et cetera, et cetera can.
Can you be more competitive for some of these rate sensitive deposits and I'll tell you. The spirit of the question is is you're competing in many cases against.
Institutions with our branch network and therefore, our cost structure associated with with that in theory your cost structure should be really quite competitive.
Once you get all of your agreements in place how are you thinking about that longer term with those competing.
Competing for with <unk> for those.
More rate sensitive customers.
Hey, this is Raj.
Obviously that is a consideration and that is something that we do discuss with our bass partnerships and at this stage.
We don't have a current plan in place.
But it is something we are in consideration of.
And if you were to.
Have a partner that wanted to be more competitive that way is that essentially where.
I mean, some combination of.
Of the bank, the best partner and BMT or each take.
I haircut of some level in their margin, which ultimately ends up in the consumer's pocket.
Make you more competitive is that some form of that.
Yes, absolutely that's one of the models that we're contemplating and reviewing.
Great. Thank you all for the assistance.
Thank you.
There are no further phone questions.
I'll turn the call back to Brian for web based questions.
Thank you operator, I am not currently seeing any questions in the queue. So I will turn the call back to Loveline Kristen.
For some closing remarks.
Okay. Thank you Brian . Thank you everyone for joining us joining us today.
We'll see you next quarter. Thank you.
This concludes today's conference call you may now disconnect.
Okay.
Yeah.
Yeah.
Yeah.
Okay.
Yes.
Yes.